Oil Rises as Strong Demand Outweighs Supply Concerns

Oil rebounded on Tuesday as Israeli Prime Minister Benjamin Netanyahu warned the Obama administration against accepting a weak nuclear deal with Iran, and rival Libyan forces targeted oil terminals in the African nation.

Higher prices imposed by Saudi Arabia for its crude buyers in Asia, the United States and northwest Europe were another positive development, traders said, although some had expected benchmark Brent and U.S. oil futures to rally even more on that.

U.S. crude futures were volatile on concerns that oil inventories in the United States had hit new record highs.

Oil got a strong start after rival Libyan forces carried out tit-for-tat air strikes on oil terminals and an airport, reviving fears over local crude supplies.

Gains accelerated just before noon in New York when Netanyahu told the U.S. Congress that the nuclear deal being negotiated by Washington and Tehran would almost guarantee nuclear weapons for OPEC member Iran.

"His speech may have reinforced the geopolitical tensions around Iran, though I don't believe this rebound has legs given the fundamental picture of oil oversupply," said Gene McGillian, senior analyst at Tradition Energy in Stamford, Connecticut.

Brent's front-month contract <LCOc1> settled up $1.48, or 2.5 percent, at $61.02 a barrel. It tumbled nearly 5 percent on Monday, its biggest loss in a month, on speculation that a quick nuclear deal between Iran and the West could ramp up Tehran oil's exports, adding to global inventories.

U.S. crude's front-month <CLc1> finished up 88 cents at $50.47 a barrel, after falling into negative territory earlier.

The U.S. market was choppy for most of the day on worries that domestic crude stockpiles had reached new all-time highs last week after an eighth straight week of builds.[EIA/S]

U.S. crude was also under pressure from a spread play versus Brent, as players bet on it to decline further before inventory data issued by the government-run Energy Information Administration on Wednesday. The American Petroleum Institute, an industry group, will issue its own stockpile data at 4:30 p.m. EST (2130 GMT) on Tuesday.

Brent's premium to U.S. crude <CL-LCO1=R> stood at $10.50 a barrel at Tuesday's settlement, off from the earlier peaks above $11 but higher than Tuesday's close of $9.95.

(By Barani Krishnan; Additional reporting by Robert Gibbons in New York, Libby George in London and Henning Gloystein in Singapore; Editing by David Evans, David Clarke, Meredith Mazzilli and Paul Simao)